More on Grandfathered Plans

We have previously offered assistance in translating whether it's worth it to remain a "grandfathered" plan under the new legislation.

Today we have further guidance on what all of this means thanks to our partners at ZyWave!

New Rule for Grandfathered Plans

Under the Patient Protection and Affordable Care Act (PPACA), health plans that existed on March 23, 2010 are generally considered “grandfathered plans.” Grandfathered plans are exempt from some of the health care reform requirements, including coverage of preventive care services with no cost-sharing and patient protections such as guaranteed access to OB-GYNs and pediatricians.

Regulations were issued on June 17, 2010 regarding grandfathered plans. These regulations provided that certain changes to an existing plan could cause the plan to lose its grandfathered status. For example, plans could lose grandfathered status by significantly increasing costs or reducing benefits under the plan. Under the initial rule, plans would also lose grandfathered status by changing insurance policies, even if no other prohibited changes were made to the plan.

The Departments of Labor, Health and Human Services and Treasury (the Departments) have now amended the grandfathered plan regulations to permit insured group health plans to change insurance policies or carriers. Under the amended rule, group health plans will no longer automatically lose their grandfathered status merely because of a change in the plan’s insurance policy, certificate or contract of insurance. However, making any other prohibited change will still cause a loss of grandfathered status.

Reasons for the Amendment

The Departments stated the following reasons for reversing their position on this rule:

• The initial rule treated insured group health plans differently than self-funded group health plans. Insured group health plans were not able to change issuers or policies without losing grandfathered status, while self-funded plans could change their third-party administrators (TPAs), as long as they did not make any other prohibited change. The amended rule allows all group health plans to keep their grandfathered status when changing insurance companies or TPAs.
• A group health plan may not have a choice about changing its insurance issuer; for example, if the issuer withdraws from the market. Under the new rule, the plan sponsor can maintain grandfathered status if it has to contract with a new issuer.
• The initial rule unnecessarily restricted the ability of issuers to reissue policies to current plan sponsors for administrative reasons not related to the underlying terms of the plan. Issuers can now transition policies to a subsidiary or consolidate policies without losing grandfathered plan status.
• The initial rule potentially gave issuers undue and unfair leverage in negotiating the price of coverage renewals with grandfathered plan sponsors, which could interfere with competition and cost containment.

The New Rule Applies Only to Certain Plans
The amendment to the grandfathered plan regulations applies to insured group health plans only. For individual policies, a change in issuer is still considered a change in the health insurance coverage in which the individual was enrolled on March 23, 2010, and the new individual policy, certificate or contract of insurance would not be a grandfathered plan.

Also, whether the amended rule applies to your plan will depend on when the coverage under the new policy was effective. The amendment applies to changes to group health insurance coverage that are effective on or after November 15, 2010. The amendment does not apply retroactively to changes to group health insurance coverage that were effective before November 15, 2010.

For purposes of determining when a change is effective, the date the new coverage becomes effective is the operative date, not the date a contract for a new policy, certificate or contract of insurance is entered into.

For example, if a plan enters into an agreement with an issuer on September 28, 2010 for a new policy to be effective on January 1, 2011, then January 1, 2011 is the date the new policy is effective. Therefore, the relevant date for purposes of determining the application of the amendment is January 1, 2011. However, if the plan entered into an agreement with an issuer on July 1, 2010 for a new policy to be effective on September 1, 2010, then the amendment would not apply and the plan would lose its grandfathered status.

Other Grandfathered Plan Guidelines Still Apply
Although grandfathered plans can now change policies or issuers without automatically losing grandfathered status, the plan will still cease to be a grandfathered plan if the new policy includes changes that are prohibited by the regulations. As with the other provisions of the regulations, the amended rule applies separately to each benefit package made available under a group health plan.

To maintain status as a grandfathered health plan, a group health plan that enters into a new policy, certificate or contract of insurance must also give the new health insurance issuer documentation of the plan’s terms under the prior coverage, including information about benefits, cost-sharing, employer contributions and annual limits. This information must be sufficient to allow the insurer to determine whether a change causing a loss of grandfathered status has occurred.

What Are the New Insured Plan Nondiscrimination Rules?

On September 20, 2010, the IRS issued Notice 2010-63 (the "Notice"), requesting comments on the application of the Code § 105(h) nondiscrimination rules to insured group health plans and providing certain information regarding penalties.

The Patient Protection and Affordable Care Act ("PPACA") amends section 2716 of the Public Health Service Act ("PHSA") to apply certain nondiscrimination requirements of § 105(h) of the Internal Revenue Code (the "Code") to fully insured group health plans. PPACA also incorporates these new requirements into the Code and the Employee Retirement Income Security Act ("ERISA").

What guidance is provided in the Notice?
The Notice addresses PPACA's prohibition (in new PHSA § 2716 and conforming amendments to chapter 100 group health plan requirements in the Code and part 7 of ERISA) against discrimination in favor of highly compensated individuals in insured group health plans. The Notice states that PHSA § 2716 incorporates the substantive nondiscrimination requirements of Code § 105(h) that apply to self-insured plans -- but not the taxes on highly compensated individuals in Code § 105(h)(1) – and applies them to insured group health plans. The main purpose of the Notice is to solicit comments and announce the November 4, 2010 deadline for submitting such comments. The Notice does, however, include several clarifying points concerning the application of PHSA § 2716 and related penalties.

What specifically does the Notice provide regarding the penalties for violating the new nondiscrimination rules?
The Notice makes clear that the consequences of violating Code § 105(h) that apply to discriminatory self-insured health plans do not apply to insured plans that are subject to the substantive requirements of Code § 105(h) pursuant to PHSA § 2716. More specifically, it makes clear that the highly compensated individuals involved are not required to include all or a portion of the benefits received in income as they are in self-insured plans under Code § 105(h). Rather, the following penalties apply in the case of a violation under a fully insured arrangement:

• The Code: There is a $100 per day per individual excise tax in Code § 4980D that applies to violations of the chapter 100 group health plan requirements (capped at 10 percent of the aggregate amount paid or incurred by the employer during the preceding taxable year for the group health plan or $500,000, whichever is less). The Notice makes clear that this tax applies with respect to individuals who are discriminated against for each day the plan does not comply with the requirement (i.e., individuals who are not eligible for coverage under a plan). The excise tax is imposed on the employer or, in the case of a multiemployer plan, on the plan, and does not apply to small employers with between 2 and 50 employees. Employers have an affirmative obligation to report this tax liability on Form 8928.
• ERISA: There is an ability to bring a civil action to enjoin a noncompliant act or practice or for appropriate equitable relief under part 7 of ERISA. Thus, DOL may enforce this provision against a group health plan. In addition, participants, beneficiaries, and fiduciaries may sue to enforce this provision.
• PHSA: There are civil money penalties of $100 per day per individual discriminated against for each day the plan does not comply with the requirement (capped at 10 percent of the aggregate amount paid or incurred by the employer during the preceding taxable year for the group health plan or $500,000, whichever is less). This penalty appears to be limited in this context to non-federal governmental group health plans.

Does the IRS intend to issue any additional guidance regarding the specific nondiscrimination testing rules that will apply to insured plans?
In its request for comments, the Notice notes that the final regulations under Code § 105(h) were issued in 1981. It then states that the Department of Treasury and the IRS are considering issuing guidance on the extension of the Code § 105(h)(2) requirements to insured group health plans, and requests comments on what additional guidance relating to the application of Code § 105(h)(2) would be helpful. This suggests that any such additional guidance will supplement and/or amend the guidance contained in the final regulations issued in 1981. (It also suggests that Treasury/IRS may not intend to revise/clarify the rules under Code § 105(h) generally.)

The final regulations that were published in 1981 (Treas. Reg. § 1.105-11) leave many questions unanswered. As a result, it is often necessary to look to other, lesser forms of guidance (e.g., private letter rulings, informal IRS internal advice memorandums, and informal statements made by IRS officials) for clarification on basic issues. Obtaining certainty in this area is further complicated by the fact that the IRS will not issue private letter rulings on issues involving Code § 105(h). See Rev. Proc. 2010-3, § 3.01(10).

What reporting requirements apply to nondiscrimination testing failures?
If there is a failure to comply with the new nondiscrimination requirements applicable to insured plans, there is an affirmative reporting requirement (Form 8928) that requires an employer to report any violations of Code § 4980D and to pay associated excise tax to the IRS. In general, the excise tax and Form 8928 are due on or before the due date for filing the employer's federal income tax return (without extension). An extension to file the employer's federal income tax return does not extend the date for paying the excise tax and filing Form 8928. For multiemployer plans and multiple employer health plans, the return is due on or before the last day of the seventh month after the end of the plan year.

How Will the 2010 Elections Affect Health Care Reform?

We can't predict the future but have leveraged our partners at ZyWave to give us insight on what the future holds for health care reform post election day.

The recent elections, held on November 2, 2010, are bringing big changes to Washington. Results of a few races are still to be finalized in the days after the elections, but it is already clear that we are looking at a new political landscape.

Republicans have taken control of the House of Representatives, gaining at least 60 seats there. These wins give the party the largest House majority it has had since the 1940s. However, Democrats are set to maintain a slim majority in the Senate.

Potential Health Care Reform Changes
Many Republican candidates included promises regarding health care reform in their campaigns. These promises ranged from making changes to the law to outright repeal. However, employers and plan sponsors should keep in mind that such changes will not be automatic or immediate. Any changes to health care reform will have to go through the same legislative process that the initial reform package endured.

Current House Minority Leader John Boehner (R-Ohio) is expected by many to become Speaker of the House. In the wake of the elections, Rep. Boehner has indicated that Republicans would move slowly with changes to “lay the groundwork before we begin to repeal” health care reform.

With a divided Congress, any efforts to completely repeal the legislation will face obstacles. Even if a full repeal could make it through the Senate, President Obama could still veto any repeal legislation. Because of that probability, some Republicans have indicated that that they would try to repeal the health care law “piece by piece,” using strategies like blocking funding or regulations. Other Republicans have also said they may try to replace, rather than repeal, parts of the law.

Provisions of the law that are likely to be targeted for revision or repeal include:

• The requirement for businesses to report payments in excess of $600 on a Form 1099;
• The employer responsibility provisions, which provide that employers can face penalties for not providing a certain level of health coverage to employees;
• The individual responsibility requirement, which imposes penalties on individuals who do not obtain coverage;
• The Cadillac Plan tax on high-cost, employer-sponsored health plans;
• The tax on manufacturers of medical devices; and
• Cuts to Medicare.

Republicans have also suggested changes to the planned health insurance exchanges, which will take effect in 2014, to give states more power in designing the exchanges. However, members of the GOP have also said that they may want to keep some of the law’s provisions that are popular with consumers. Some experts have warned that keeping some parts of the law while repealing others may not be practical.

Democrats are standing behind the health care package and some exit polls show that the public is split on whether health care reform should be repealed. However, party leaders, such as President Obama and Senate Majority Leader Harry Reid (D-Nevada) have indicated a willingness to revise some portions of the law, especially if changes will bring faster and more effective reform to the health care system.

What’s Next?

Despite all these changes, and potential future changes, the health care reform law as we know it is the law. Employers and health plan sponsors should make sure they are implementing the requirements as they become effective. If any changes are made to parts of the law that have already taken effect, there will likely be time for employers and plan sponsors to put changes into place.